NAMIC Issue Analysis Papers

Best Practices for Regulating Property Insurance Premiums and Managing Natural Catastrophe Risk in the United States
As a response to the Federal Insurance Office’s 2013 report that called on state-level policymakers to identify and implement best practices with respect to insurance rate regulation and natural disaster mitigation, Patricia Born, Ph.D., Florida State University, and Robert Klein, Ph.D., Georgia State University, examine the features of state regulatory environments that serve either to mitigate or exacerbate the adverse effects of natural catastrophes on property insurance markets. The paper addresses four areas of regulation: regulation of rates and underwriting practices; administration of residual market mechanisms; regulation of insurance policy provisions; and regulation of claim settlement practices. (Published: 11/2015)

Unmanned Aerial Systems/Drones - Regulation, Liability and Insurance Requirements
With commercial use of unmanned aerial systems, more commonly known as drones, expected to rapidly increase, Tom Karol, NAMIC general counsel – federal, examines the often overlooked and as yet unresolved questions about how such systems would be covered for loss, damage and liability, and how this emerging technology could also impact insurer operations. The regulatory structure for commercial drone use – in terms of not only how drones can be used but also who is allowed to use them for commercial purposes – is still in the early stages of its development. In the paper Karol outlines how decisions from federal, state, and even local policymakers could impact insurance coverage for UASs. (Published: 2/2015)

"Unnecessary Injury: The Economic Costs of Imposing New Global Capital Requirements On Large U.S. Property and Casualty Insurers," by Robert Shapiro, Ph.D.
This paper offers a look at the potential costs of current efforts toward globalization of financial standards that began in the wake of 2008-2009 financial crisis. Based on his extensive research, Dr. Shapiro projected the potential costs of such standards for consumers at as much as $109 in increased homeowners insurance premiums, and found that the standards could slow the growth of insurance offerings by as much as $7.3 billion each year. Shapiro, the chairman of Sonecon, LLC, a private firm that advises U.S. and foreign businesses, governments, and non-profit organizations on market and political conditions affecting economic policy and security matters, and has served as an advisor to former President Bill Clinton and former British Prime Minister Tony Blair, among others.(Published: 11/2014)

Insurance Regulation and the Challenge of Solvency II: Modernizing the System of U.S. Solvency RegulationSignificant changes in insurance regulatory policies and practices at an international level, including the European Union’s Solvency II directive, have prompted U.S. regulators to reconsider the current system of insurer solvency oversight. This paper provides a comprehensive review and analysis of the current U.S. system of solvency regulation, and describes and assesses the five principal components of the National Association of Insurance Commissioners’ Solvency Modernization Initiative. This is followed by an evaluation of the NAIC’s risk-focused surveillance framework and current U.S. regulatory policies and practices with respect to insurance prices, products, and market conduct. The paper concludes with a summary of the key findings in each of these areas and their implications for the future of insurance regulation in the U.S. (Published: 11/2012)

No-Fault Insurance at 40: Dusting Off an Old Idea to Help Consumers Save Money in an Age of AusterityIn 1971, Massachusetts became the first state to implement a no-fault law, but since 1975, no state has enacted a similar law. The authors of this paper argue that no-fault was never given a chance in its intended form, and the failure of the state laws to lower premiums lies not in the no-fault concept itself, but because the laws were structured in such a way as to undermine the law’s effectiveness. The authors also argue that in a time when government deficits will result in lower benefits and higher costs for Americans on many fronts, property structured no-fault laws – ones that take advantage of the new national health insurance law to reduce medical costs and give consumers the option to elect not to sue for pain and suffering – could enable consumers to save tens of billions of dollars a year. (Published: 12/2011)

Consumer Choice in Automobile Repair PracticesInsurers’ use of direct repair programs and aftermarket cosmetic crash parts has come under attack in state legislatures and courts by groups whose economic interests are threatened by these practices. These groups – which consist primarily of non-DRP shops and manufacturers of OEM parts – contend that insurers’ use of DRPs and aftermarket parts forces consumers to accept shoddy repairs performed by substandard shops using inferior replacement parts. These claims do not withstand scrutiny. Robust competition in the U.S. automobile insurance market has created strong incentives for insurers to find ways to both reduce the price of insurance for consumers and to ensure that their customers experience a high level of satisfaction with the vehicle repair process and outcome.(Published: 9/21/2010)

The Financial Crisis, Systemic Risk, and the Future of Insurance RegulationThe bursting of the housing bubble and resulting financial crisis have been followed by the worst economic slowdown since the early 1980s if not the Great Depression. This Issue Analysis considers the role of AIG and the insurance sector in the financial crisis, the extent to which insurance involves systemic risk, and the implications for insurance regulation. It provides an overview of the causes of the financial crisis and the events and policies that contributed to the AIG intervention. It considers sources of systemic risk, whether insurance in general poses systemic risk, whether a systemic risk regulator is desirable for insurers or other non-bank financial institutions, and the implications of the crisis for optional federal chartering of insurers and for insurance regulation in general. (Published: 9/22/2009)

First-Party Insurance Bad Faith Liability: Law, Theory, and Economic ConsequencesThe idea that insurers should be penalized for unfair claim settlement practices involving first-party insurance coverage is a relatively recent development in the long history of insurance law. Today, many states allow for recovery of consequential, or incidental, damages, attorney’s fees, and prejudgment interest, as well as the benefit owed under the policy, in a first-party insurance bad faith case. The paper concludes that certain features of recent legislation in several states will create incentive distortions that may lead to greater uncertainty and higher costs for insurers, higher levels of insurance fraud, and correspondingly higher insurance premiums for consumers. (Published: 9/26/2008)

The Assault on the McCarran-Ferguson Act and the Politics of Insurance in the Post-Katrina EraSeven of the ten most costly hurricanes in the history of the United States occurred in a 14-month period spanning parts of the 2004 and 2005 hurricane seasons. In response to perceived problems related to insurance industry claims and underwriting practices following these storms, some policymakers are offering legislation that would repeal a provision of the McCarran-Ferguson Act of 1945 that gives insurers a limited exemption from federal antitrust laws. (Published: 9/21/2007)

Auto Insurance Reform Options: How to Change State Tort and No-Fault Laws to Reduce Premiums and Increase Consumer ChoiceStarting in the early 1970s, 16 states adopted no-fault laws as a way to reduce premiums, although no-fault also promised better compensation by eliminating much of the lawsuit system with its high overhead costs of attorneys and pain and suffering awards. The momentum towards no-fault stopped in the late 1970s, and much of the debate since then has been over whether to reform or repeal the no-fault laws. Where this debate has occurred, all too often the proposed reforms were transparent attempts to maintain the status quo, leading interest groups and policymakers who would normally support the no-fault concept to reject disingenuous “reforms” in favor of outright repeal.(Published: 10/4/2006)

Insuring the Uninsurable: Private Insurance Markets and Government Intervention in Cases of Extreme RiskFor some risks, private insurance markets are unable to provide sufficient coverage to meet society’s needs. These risks – commonly called extreme or catastrophic risks – are uninsurable through conventional insurance markets because they defy the conditions private markets require for operation. A review of federal government programs shows that they bear less resemblance to insurance than to targeted public spending or risk management programs aimed at discharging the government’s sovereign responsibilities of providing national and economic security and economic stabilization. These programs do not confer on federal agencies any particular expertise in providing or regulation insurance and, therefore, such programs should not be considered justification for federal regulation of private insurance markets.(Published: 6/21/2005)

It’s Time to Admit that SOX Doesn’t Fit: The Case Against Applying Sarbanes-Oxley Act Governance Standards to Non-Public Insurance CompaniesThe National Association of Insurance Commissioners has developed a proposal to incorporate elements of the Sarbanes-Oxley Act into the insurance laws of every state. These rules would be applied to thousands of mutual insurance companies, which by definition are non-public companies. State regulators and legislators should reject proposals to apply investor-oriented protections to non-public companies, and instead allow the companies free to adopt provisions of Sarbanes-Oxley on a voluntary basis. If adherence to selected provisions of Sarbanes-Oxley is to be made mandatory, such a policy choice should be made solely by state legislatures and governors acting in accordance with constitutionally prescribed legislative procedures. (Published: 6/2/2005)

The Legal Theory of Disparate Impact Does Not Apply to the Regulation of Credit-Based Insurance ScoringAttempts to apply a “disparate impact” legal standard to the use of credit-based insurance scores by insurers ignore case law, federal authorization of the practice, state laws that protect consumers from unfair discrimination and the benefits consumers derive from its use. The Legal Theory of Disparate Impact Does Not Apply to the Regulation of Credit-Based Insurance Scoring offers a critical analysis of current efforts to extend the disparate impact legal theory to the use of credit-based insurance scoring, exposing the theory’s inherent flaws and highlights the special difficulties that arise when the theory is applied to situations other than employment discrimination litigation. (Published: 7/7/2004)

The Damaging Effect of Regulation of Insurance by the CourtsThe notion that people should be able to rely on the law is so fundamental that it should not have to be defended. Yet, tort litigation over the last decade has begun to erode this obvious truth. When a court steps outside its traditional role of resolving individual disputes, and places itself in the shoes of legislators or regulators, our ability to rely on the letter of the law is shaken. This is particularly true of the insurance industry because it is so heavily regulated. If we cannot presume that a practice authorized by a legislature or approved by a regulator is legal, then there are grave implications for the rule of law. However, the problem is not only legal. The ill effects of “regulation through litigation” can damage entire markets, affecting everyone - including consumers. (Published: 8/12/2003)

Regulation of Property/Casualty Insurance: The Road to Reform (Updated: October 2006)NAMIC supports a reformed system of state property/casualty insurance regulation as the optimum regulatory structure. “A reformed system of state insurance regulation is superior to an unproven new system of federal regulation crafted in a difficult political environment,” stated David Anderson, NAMIC chairman and secretary/treasurer of Farm Mutual Insurance Co. of Lincoln County, Canton, S.D. “The road to reform runs through state capitals, not Washington, D.C.” (Published: 4/12/2002)

Market Conduct Regulation for a Competitive EnvironmentIn the spring of 2000, the National Association of Mutual Insurance Companies (NAMIC) released a report which noted that a critical mass of activity is pushing policymakers in the direction of creating more uniform insurance regulatory procedures and greater consistency of state standards. (Published: 3/14/2001)

Accepting The Challenge: Redefining State Regulation NowThe National Association of Mutual Insurance Companies (NAMIC) favors the enactment of more uniform insurance regulatory standards by every state as the last, best hope for maintaining and improving the existing system of sovereign state insurance regulation. The threat to state regulation is so significant today that an unprecedented partnership of industry leaders, regulators and state policymakers is needed to put the necessary reforms in place. (Published: 4/18/2000)

Should the Community Reinvestment Act Apply to Insurance Companies?This paper, which looks at the Community Reinvestment Act's (CRA) application to financial services sectors beyond banking, examines the question of whether new social investment obligations on the property/casualty insurance industry represent good public policy. Developed by a special task force of member companies and approved by NAMIC's board of directors, the paper includes a bold evaluation of the social, political and economic environment in which the insurance industry operates. (Published: 8/31/1999)

Focus On The Future Options For The Mutual Insurance CompanyThe environment in which mutual insurance companies must compete for policyholders, for revenue, and for capital is rapidly changing. To meet the challenges of the changing economic climate, mutual insurance companies in the United States, Canada and abroad have moved to restructure, recapitalize and adapt to their changed competitive circumstances. (Published: 1/6/1999)